Sentiments and Economic Activity: Evidence from U.S. States
We examine whether sentiment influences aggregate demand by studying the relationship between the Michigan Survey expectations concerning national output growth and future economic activity at the state level. We instrument for local sentiments with political outcomes, positing that agents in states with a higher share of congressmen from the political party of the sitting President will be more optimistic. This instrument is strong in the first stage, and our results confirm a positive relationship between sentiments and future state economic activity that is robust to a battery of sensitivity tests.
Helpful comments were received from Simon Gilchrist, Christian Gillitzer, Oscar Jorda, Atif Mian, Jianjun Miao, Morten Ravn, Amir Sufi, Dan Wilson, Tao Zha, the SWUFE International Macro-Finance Conference in Chengdu, China, seminar participants at the Federal Reserve Bank of San Francisco, and two anonymous referees. Rebecca Regan and Ben Shapiro provided excellent research assistance. Our views are our own and not necessarily those of the Federal Reserve Board, the Federal Reserve Bank of San Francisco, or the National Bureau of Economic Research.
Jess Benhabib & Mark M Spiegel, 2019. "Sentiments and Economic Activity: Evidence from US States," The Economic Journal, vol 129(618), pages 715-733. citation courtesy of